UK Price Shock Sends Bond Yields to Levels Last Seen Under Truss
Comment of the Day

May 24 2023

Commentary by Eoin Treacy

UK Price Shock Sends Bond Yields to Levels Last Seen Under Truss

This article from Bloomberg may be of interest to subscribers. Here is a section: 

UK bond yields are back to where they were when Liz Truss was in No. 10 after a shocking inflation report prompted traders to bet on more rate hikes from the Bank of England.

The inflation rate came in higher than all economists forecast — sending wagers on future interest-rate hikes soaring and lifting yields to levels last seen when the former Prime Minister rattled markets with her unvetted mini-budget. 

The rate on 10-year securities now pays a premium of more than 50 basis points over equivalent US notes, around the biggest seen in more than a decade. A key part of the curve inverted the most since February, a sign bond traders are positioning for short-term borrowing costs to remain elevated for longer. 

“It’s a terrible inflation print that really sets the UK apart from other major developed economies,” said Derek Halpenny, head of research, global markets EMEA & international securities at MUFG Bank. “The scale of divergence on the inflation path risks undermining policy credibility.”

Eoin Treacy's view

The whole point of creating an ex-food and energy inflation measure was to reduce the impression inflation is out of control. We have rather the opposite condition at present because the core figure is breaking out to new highs while the broad measure is contracting. That’s not good news because the core measure is centred on shelter and services and only a steep recession is likely to have a meaningful effect on the price of either.

10-year yields rallied to test the October peak today but closed off the high. The rate is quite overextended in the short-term so there is scope for a pause. However, a sustained move below the 200-day Ma will be required to confirm a return to demand dominance.

The Pound is easing back relative to the Dollar and remains steady versus the Euro.

Meanwhile the FTSE-250 is rolling over, having encountered resistance in the region of the 200-day MA. It needs to hold the 18000 area if support building is to be given the benefit of the doubt. 

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